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DOUBLE DOWN-AND-OUT: THE
CONNECTION BETWEEN PAYDAY LOANS
AND BANKRUPTCY
Nathalie Martin* and Koo Im Tong**
A payday loan is a small, triple-digit interest rate loan, typically in the
range of $200 to $500, secured by the consumer‟s post-dated check or debit
authorization.1 These loans were originally designed to advance money to a
consumer until payday, and then the loan would be paid back in one lump
sum on payday.2 A typical payday loan might allow a customer to borrow
$400, for fourteen days or fewer, for a $100 fee.3 Most commonly, the loan
is designed as an interest-only loan, with the interest payment, $100 in this
example, due every two weeks thereafter. The principal stays out
indefinitely, and after two months, the lender has recouped the original
value of the principal. Several billion dollars are currently owed by
American consumers for loans of this type.4 Payday and other short-term
* Keleher & McLeod Professor of Law, University of New Mexico School of Law. The
author thanks Ozymandias Adams for his fine research assistance and Judith Sloan, Chris
Cameron, and Mark McManigal for an inspiring and informative conference. The author also
thanks the National Conference of Bankruptcy Judges and the University of New Mexico School
of Law for their financial support for this project.
** Associate, Moore, Berkson, and Gandarilla, Albuquerque, New Mexico. The author
thanks Nathalie Martin for her generosity and encouragement and Brett Andrzejewski for his
support.
1. See ConsumersUnion.org, Fact Sheet on Payday Loans, http://www.consumersunion.org/
finance/paydayfact.htm (last visited April 20, 2010).
2. See id.
3. Kept out for one year, this loan would earn interest in the amount of $2600 and the
borrower would still owe the principal of $400.
4. LESLIE PARRISH & URIAH KING, CTR. FOR RESPONSIBLE LENDING, PHANTOM DEMAND:
SHORT-TERM DUE DATE GENERATES NEED FOR REPEAT PAYDAY LOANS, ACCOUNTING FOR
76% OF TOTAL VOLUME 13 (2009) (“The result of these 59 million unnecessary loans is that
borrowers pay about $3.5 billion in fees to avoid having to permanently part ways with the
principal borrowed in one fell swoop.”).
785
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loan outlets almost tripled in number from 1999 to 2006,5 and now
outnumber all McDonalds and Starbucks stores combined.6 Some claim
that this is the fastest growing segment of the consumer-credit industry,7
and that as the economy falters, more and more middle-income people may
use this form of credit.
These loans are loathed by many because they carry such high interest
rates, because customers frequently do not understand the terms of the
loans, and because they arguably create a cycle of debt from which many
customers cannot escape.8 In addition, payday lenders have been criticized
for questionable collection tactics and for targeting minorities.9 For
example, a study conducted by the Center for Responsible Lending
(“CRL”), a payday lending foe, found that “[p]ayday loan stores are nearly
eight times more concentrated in California‟s African-American and Latino
neighborhoods as compared to white neighborhoods, draining these
5. Patrick M. Aul, Federal Usury Law for Service Members: The Talent-Nelson
Amendment, 12 N.C. BANKING INST. 163, 165 (2008). One customer we spoke to noted that a
shop with one employee in 2003 now has six employees.
6. Mary D., 10 Shocking Facts About Payday Loans, PAYDAY LOANS.ORG, Oct. 26, 2009,
http://www.paydayloans.org/10-shocking-facts-about-payday-loans/.
7. See, e.g., CFSA, http://www.cfsa.net/ (last visited April 20, 2010) (“We invite you to
explore our site to learn more about one of the fastest growing financial service industries in the
United States.”); Apurva Shree, Fax Less Low Cost Payday Loan—Trouble-Free Fast Cash
Loans, AMERICAN CHRONICLE, Nov. 4, 2007, http://www.americanchronicle.com/articles/view/
42013 (“With so many factors in their favor it is no wonder that the payday lending industry is
one of the fastest growing industries with many people opting for fax less low cost payday loan.”).
8. See ConsumersUnion.org, Fact Sheet on Payday Loans, http://www.consumersunion.org/
finance/paydayfact.htm (last visited April 20, 2010).
9. In one case, a customer named Floyd Watkins was “held against his will” in a payday
lender‟s store by the store manager for failing to repay his loan. Valued Servs. of Ky. v. Watkins,
No. 2008-CA-001204-MR, 2009 WL 1705696, at *1 (Ky. Ct. App. 2009). Watkins informed the
manager that “he could not repay his loan on that day, but that he would be able to do so three
days later.” Id. The manager insisted that Watkins repay the entire loan amount that day and
stated that he would not be allowed to leave until he had paid in full. Id. The manager “pushed a
button to lock the office door and would not allow Watkins to leave even though he repeatedly
asked to do so.” Id. The manager then “telephoned her regional manager . . . and told [the
regional manager] that „I have a black guy over here that refuses to pay his bill and he‟s not going
to leave until he does.‟” Id. Watkins later sued for false imprisonment. Id. at *2.
See also DebtConsolidationCare.com, Trihouse Enterprises, Inc. Sells How-to Manuals on
PDL, http://www.debtconsolidationcare.com/getting-loan/payday-industry.html (last visited April
20, 2010) (providing debt consolidation services). This website reports on the payday loan
industry‟s “intimidation sheet,” and discusses some of the methods used by the industry to collect
more fees and mislead customers. Id. One manual, discussed on the website, warns lenders by
stating, “You may be surprised at the number of persons unable to manage their finances.” Id.
This manual also advises prospective payday lenders to “visualize a uniformed, gun toting U.S.
Marshal arriving at their place of employment (to collect money). Emphasize to them that this
U.S. Marshal will first ask for (their) immediate supervisor!” Id.
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communities of some $250 million in payday loan fees annually.”10 And
“[e]ven after accounting for factors like income, education and poverty
rates, the CRL still found that these lenders are 2.4 times more concentrated
in African-American and Latino neighborhoods.”11
While at least one scholar has attempted to argue that payday loans do
not create a cycle of debt, the mathematics of the situation make that
difficult to imagine. Once one has used a payday loan, for example by
borrowing $400 at $25 per $100 in order to pay the rent, the borrower will
then owe an extra $200 every month, unless he or she can get out from
under the initial loan by paying it off. That means there is $200 less
discretionary income available each month for other household items or
necessities, which is enough money to be significant in many households,
but particularly in households already experiencing cash flow difficulties.
Many scholars have previously studied the connection between payday
loans and bankruptcy, and have reached varying conclusions.12 Some
scholars have concluded that payday loans do not cause bankruptcy.13 The
evidence they rely on suggests that once states have banned payday
lending,14 residents of those states experience higher Chapter 7 bankruptcy
filings, bounce more checks, and file more complaints with the Federal
10. Desiree Evans, Predatory Payday Lenders Target Black and Latino Communities,
FACING SOUTH, March 27, 2009, http://southernstudies.org/2009/03/payday-lenders-targetblacks-and-latino-communities.html.
11. Id.
12. Compare Donald P. Morgan & Michael Strain, Payday Holiday: How Households Fare
After Payday Credit Bans 26, (Fed. Reserve Bank of N.Y. Working Paper, Paper No. 309, 2008),
available at http://newyorkfed.org/research/staff_reports/sr309.pdf (finding that Chapter 7
declarations increased in two states following the abolition of payday loans) and Petru S.
Stoianovici & Michael T. Maloney, Restrictions on Credit: A Public Policy Analysis of Payday
Lending 1 (2008), available at http://ssrn.com/abstract=1291278 (concluding, based on their study
of state data collected between 1990 and 2006, that there is no empirical evidence to support the
proposition that payday lending leads to more bankruptcy filings), with Paige M. Skiba & Jeremy
Tobacman, Do Payday Loans Cause Bankruptcy? 1 (2009), available at http://papers.
ssrn.com/sol3/papers.cfm?abstract_id=1266215 (“[F]or first-time applicants near the 20th
percentile of the credit-score distribution, access to payday loans causes [C]hapter 13 bankruptcy
filings over the next two years to double.”) and Robert Mayer, Payday Lending and Personal
Bankruptcy, 50 CONSUMER INTERESTS ANN. 76, 81 (2004), available at
http://www.luc.edu/faculty/rmayer/mayer19.pdf (finding that bankruptcy debtors who reported
payday loans filed for bankruptcy with less total debt than those bankruptcy debtors who did not
list payday loans); Mary Spector, Taming the Beast: Payday Loans, Regulatory Efforts, and
Unintended Consequences, 57 DEPAUL L. REV. 961, 966 (2008) (“One industry study reported
that 15.4% of all payday borrowers have filed for bankruptcy—compared with 3.7% of the
general population—and only 41.7% own their homes—compared with 66.3% of all adults.”).
13. See, e.g., Morgan & Strain, supra note 12, at 26.
14. Naturally, these are states that at one time allowed payday lending.
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Trade Commission against lenders and debt collectors.15 Other scholars
argue that payday loans do lead to increases in bankruptcy filings.16
Proponents of this view came to the conclusion, at least in part, after
analyzing the common characteristics of bankruptcy petitioners who have
taken out payday loans.17
This Article reviews the literature on this debate but does not weigh in
on the subject of causation between bankruptcy and payday loans. Rather,
it uses these studies, as well as a general discussion of bankruptcy filing and
payday loans, as a backdrop for analyzing new data regarding the
correlation between bankruptcy filing and the use of payday loans. This
Article reports on an empirical study conducted in the state of New Mexico
that measures rates of payday loan use among bankruptcy debtors from a
large sample of publicly available bankruptcy data.
Part I of this Article discusses the payday loan industry, its business
model, how the loans work, and who the likely payday lending customer is.
Part II reviews the current literature regarding the connection between
payday loans and bankruptcy, and suggests some ways in which the
existing literature falls short of fully answering the question of whether
payday lending causes bankruptcy filing. Part III describes the new
empirical study from New Mexico. This Article describes the method used
to conduct this study as well as its results. In summary, our data show that
from 2007 to 2009, 18.9 percent of bankruptcy debtors in New Mexico
reported using payday loans. Compared to the use of payday loans reported
in other studies among the general population, as well as past studies on
payday loan use among bankruptcy debtors, this rate of usage is extremely
high. Moreover, the correlation between bankruptcy and payday loans
seems to be getting stronger, as the use of these loan products appears to be
growing. We find that almost double the percentage of bankruptcy debtors
reported using payday loans from 2007 to 2009, than from 2000 to 2002.
Part IV of this Article concludes that while one cannot be certain that
there is a causal connection between filing for bankruptcy and using payday
or other short-term loans, there is a strong correlation between bankruptcy
filing and payday loan use. If the increasing use of payday loans is seen as
a problem, we conclude that the problem appears to be growing, despite
efforts by states to cut down on the use of these loans and to curb the use of
multiple loans at one time. In fact, the usage of multiple payday loans at
one time also has increased drastically, as recent bankruptcy debtors,
15. Morgan & Strain, supra note 12, at 3.
16. See Skiba & Tobacman, supra note 12, at 1.
17. See Mayer, supra note 12, at 76; Skiba & Tobacman, supra note 12, at 1.
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whether individuals or families, report using far more of these types of
loans simultaneously than in the past. All of this indicates that the use of
multiple loans at one time is increasing, a problem states are grappling with
but apparently are not solving.
I.
THE PAYDAY LOAN INDUSTRY AND BANKRUPTCY FILINGS: WHAT WE
KNOW ABOUT EACH
This Part discusses the basic business model used by the payday loan
industry and general usage rates for payday lending customers from
available literature on these subjects. It also describes the typical
demographic of a payday lending customer. This Part then provides
national statistics on bankruptcy filings, and concludes with statistics
specific to New Mexico.
A. Anatomy of a Payday Loan
The introduction to this Article described a payday-style loan where
$400 was borrowed until payday, for a fee of $25 per $100 borrowed.18 To
obtain this type of loan, the customer generally provides the lender with a
post-dated check for $500, and walks away with $400 in cash.19 On
payday, the lender can either deposit the customer‟s check, or if the
customer does not have $500, the customer can opt to “roll over” or extend
the loan for another two weeks20 for an additional fee of $100. This
rollover process is repeated every two weeks thereafter until the customer
can pay off the full $500.
This of course, is not the only form of payday loan available. For
example, some states have recently passed laws intended to cap fees at $15
per $100 borrowed, which, if effective, would result in a far cheaper loan.21
These same statutes, however, define the loans covered by the $15-per$100 law as only those loans that last between fourteen and thirty-five days,
require the customer to write a post-dated check, and permit the lender to
make an automatic debit transaction.22 Thus, if a payday lender wishes to
18. See supra text accompanying notes 1-3.
19. See ConsumersUnion.org, Fact Sheet on Payday Loans, http://www.consumersunion.org/
finance/paydayfact.htm (last visited April 20, 2010).
20. See id.
21. See NCSL.org, Payday Lending State Statutes, http://www.ncsl.org/default.aspx?tabid=
12473 (last visited April 20, 2010).
22. See id.
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charge more than the $15 per $100 allowed by these types of statutes, all
the lender must do is create a product that does not require a post-dated
check or a debit transaction, or one with a duration of more than thirty-five
days.
This is how the industry has evolved in many states, including New
Mexico, in order to bypass these newly-enacted statutes.23 Ironically, some
of the products designed to exploit the loopholes in the new laws are even
more profitable than the original payday loan products.24 For example, in
one form of loan used in New Mexico, the customer borrows $100, to be
repaid in twenty-six bi-weekly installments of $40.16 each, plus a final
installment of $55.34.25 In total, this borrower would pay $100 in principal
and $999.71 in interest, for an APR of 1,147 percent.26 This example
shows how short-term products vary from state to state, and that not all of
these products are necessarily even called “payday loans.”27
B. The Payday Loan Industry’s Profit Model
In spite of these egregious fees, the payday loan industry prides itself
as the fastest growing segment of the consumer credit industry.28 The
success of the payday loan industry is largely the result of an aggressive
marketing strategy.29 This Part reviews some of the marketing techniques
employed by the payday lending industry to increase profitability.
The most critical factor in the success of the payday loan industry‟s
profit model is its convenient and numerous locations.30 This may explain
why the number of payday loan institutions nearly tripled in a “seven-year
period between 1999 and 2006.”31
23. See Mary Kane, Payday Lenders Use Loopholes to Continue High-Interest Loans, THE
NEW MEXICO INDEPENDENT, Feb. 2, 2010, http://newmexicoindependent.com/46055/paydaylenders-use-loopholes-to-continue-high-interest-loans.
24. See id.
25. Posting of Felix Salmon to Reuters, http://blogs.reuters.com/felix-salmon/2010/01/07/
loan-sharking-datapoints-of-the-day/ (Jan. 6, 2010, 19:37 EST).
26. Id. This assumes the lender is not able to convince the borrower to re-borrow the
principal before the loan is paid back.
27. Nevertheless, we call all these loans “payday loans” for the sake of simplicity.
28. See CFSA, http://www.cfsa.net/ (last visited April 20, 2010) (“We invite you to explore
our site to learn more about one of the fastest growing financial service industries in the United
States.”).
29. See Carmen M. Butler & Niloufar A. Park, Mayday Payday: Can Corporate Social
Responsibility Save Payday Lenders?, 3 RUTGERS J. L. & URB. POL‟Y 119, 119, 121, 123 (2005).
30. See Aul, supra note 5, at 165.
31. Id.
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Repeat customers are also critical to profitability and constitute the vast
majority of all payday lending customers.32 For example, a study by the
Center for Responsible Lending (“CRL”), using data from North Carolina
regulators, reports that ninety-one percent of loans are made to borrowers
who take out five or more loans per year.33 Another CRL study found that
seventy-six percent of payday lending business comes from repeat
customers.34 A similar study of payday loan borrowers in Colorado
revealed that approximately sixty-five percent of loan volume in the state
comes from customers who borrow more than twelve times per year.35 In
their 2005 Federal Deposit Insurance Corporation (“FDIC”) study, Flannery
and Samolyk report that about forty-six percent of all payday loans are
either renewals of existing loans or new loans that follow immediately upon
the payment of an existing loan (“rollovers”).36 Some borrowers avoid the
renewal limits found in some state laws by alternating between payday
lenders and then by using funds obtained from each lender to pay off the
other in turn.37
Other marketing techniques used by payday lenders include offering a
free payday loan to first-time borrowers,38 and offering money to existing
customers for referring new ones.39 Since loans to repeat customers are less
costly to administer, lenders will often encourage repeat borrowing, even
going so far as to call customers as soon as a loan is paid back to offer them
more money.40
Another important revenue source for the payday loan industry comes
from late fees. In fact, one payday business plan advises payday lenders to
32. See KEITH ERNST ET AL., CTR. FOR RESPONSIBLE LENDING, QUANTIFYING THE
ECONOMIC COST OF PREDATORY PAYDAY LENDING 5 (2004).
33. Id. at 2; Race Matters: The Concentration of Payday Lenders in African-American
Neighborhoods in North Carolina, http://www.responsiblelending.org/payday-lending/researchanalysis/rr006-Race_Matters_Payday_in_NC-0305.pdf, at 3 (“91 percent of the loans go to
borrowers who are caught in a cycle of debt (receive five or more loans per year).”).
34. PARRISH & KING, supra note 4, at 1.
35. Paul Chessin, Borrowing From Peter to Pay Paul: A Statistical Analysis of Colorado’s
Deferred Deposit Loan Act, 83 DENV. U. L. REV. 387, 411 (2005).
36. Mark Flannery & Katherine Samolyk, Payday Lending: Do the Costs Justify the Price?
12 (2005), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 771624 (last visited
April 20, 2010) (representing an FDIC Center for Financial Research Working Paper, Paper No.
2005/09).
37. Chessin, supra note 35, at 411.
38. PARRISH & KING, supra note 4, at 3.
39. See MyCashNow.com, Quick and Affordable Cash Advances, http://www.mycashnow.
com/Online-Payday-Loan-refer.php (last visited April 20, 2010) (offering $100 for each referral to
My Cash Now).
40. Nathalie Martin, 1,000% Interest—Good While Supplies Last: A Study of Payday Loan
Practices and Solutions, 52 ARIZ. L. REV. (forthcoming 2010).
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maximize profits on late fees by dividing one payday loan into three or
more smaller loans, stating that:
Late fees are a very lucrative profit center. You do not need to actually
present a client‟s check(s) to the bank to have them stamp NSF [nonsufficient funds]. Purchase your own stamp! You simply say “My bank
verifies funds before accepting my deposit. . . . [Unfortunately], your
check was no good. The fee is $15 per check.” If you broke their payday
advance into two or three [smaller] checks, you can let them slide on one
41
[late fee] if you like.
There is also evidence that some lower-income people are intimidated
by banks.42 To appeal to these customers, payday lenders pride themselves
on creating an environment that is welcoming and friendly. In fact, payday
lenders advertise that unlike banks, they provide pre-approved loans
without a credit check to people with bad or no credit.43
The payday lending industry describes itself as helping people make
ends meet, and denies that their product creates a debt trap.44 However,
given the demographics of the payday customers in our study, the other
expenses common to people within this demographic, and the way these
loans are designed, it is very difficult for payday loan customers to pay
41. Center for Responsible Lending, Fact v. Fiction: The Truth About Payday Lending
Industry Claims, http://www.responsiblelending.org/payday-lending/research-analysis/fact-vfiction-the-truth-about-payday-lending-industry-claims.html#five (last visited April 20, 2010)
(stating that payday lenders have low losses and high profits, and claiming that payday lenders use
false excuses to justify their high late fees); see also DebtConsolidationCare.com, Trihouse
Enterprises, Inc. Sells How-to Manuals on PDL, http://www.debtconsolidationcare.com/gettingloan/payday-industry.html (last visited April 20, 2010) (touted as the internet‟s first get-out-of
debt community). The website claims that in 2002, affordable Payday Loan Consultants, now
called Trihouse Enterprises Inc., produced a business plan that it sold to people wanting to get
started in the payday industry. Id.
42. See REBECCA M. BLANK, 3 FEDERAL RESERVE BANK OF BOSTON, PROMOTING
BANKING SERVICES AMONG LOW-INCOME CUSTOMERS 2 (2008), http://www.bos.frb.org/comm
dev/necd/2008/issue3/LMI-banking-services.pdf.
43. See, e.g., EasyLoanFast.com, Fast Cash in 1 Hour, http://www.easyloanfast.com/ (last
visited April 20, 2010) (stating “No credit checks—Good credit, bad credit, no credit, slow
credit—makes no difference as Credit Check not required”); see also Gregory Elliehausen,
Consumers’ Use of High-Price Credit Products: Do They Know What They Are Doing? 5 (2006)
(Ind. State Univ. Networks Fin. Inst. Working Paper, Paper No. 2006-WP-02), available at
http://www.networksfinancialinstitute.org/Lists/Publication%20Library/Attachments/73/2006-WP
-02_Elliehausen.pdf (claiming, “Unlike traditional lenders, payday loan companies do not obtain a
credit bureau report”).
44. See EasyLoanFast.com, supra note 43.
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back their loans.45 Rather, as set out above, many find it necessary to
continue to pay fees without ever paying off the loan.46
In sum, the business plan of short-term lenders appears to include the
following: they set up conveniently-located storefronts in as many places as
possible, use incentives to build a base of repeat customers, hire extremely
friendly clerks who believe (to the extent possible) that they are truly
helping people in need, then begin lending as much as possible while
keeping repayments as low as legally permissible, and try to encourage late
payments to capitalize on profitable late fees.
C. Typical Payday Loan Customer Demographic
Studies have consistently found that typical payday loan customers
tend to be under the age of forty-five,47 have only a high school diploma or
GED,48 and are disproportionately racial minorities.49 The data are
supported by industry, federal government, and university based research.
Data collected on the income of families who utilize payday loans are also
fairly consistent across the board50 and, not surprisingly, reveal that families
who used payday loans have a notably lower family income than those who
did not.51 Industry reports claim that the majority of payday loan borrowers
have an annual income range between $25,000 and $50,000.52 Similarly,
data collected by the Federal Reserve Board in its 2007 Survey of
45. See AMANDA LOGAN & CHRISTIAN E. WELLER, CTR. FOR AMERICAN PROGRESS, WHO
BORROWS FROM PAYDAY LENDERS? AN ANALYSIS OF NEWLY AVAILABLE DATA 12 (2009),
http://www.americanprogress.org/issues/2009/03/pdf/payday_lending.pdf.
46. See supra text accompanying notes 19-22.
47. See WILLIAM C. APGAR, JR. & CHRISTOPHER E. HERBERT, U.S. DEP‟T HOUS. & URBAN
DEV., SUBPRIME LENDING AND ALTERNATIVE FINANCIAL SERVICE PROVIDERS: A LITERATURE
REVIEW AND EMPIRICAL ANALYSIS I-40 (2006), http://www.huduser.org/portal/
publications/hsgfin/sublending.html; GREGORY ELLIEHAUSEN & EDWARD C. LAWRENCE, CREDIT
RESEARCH CENTER, MCDONOUGH SCHOOL OF BUSINESS, GEORGETOWN UNIVERSITY, PAYDAY
ADVANCE CREDIT IN AMERICA: AN ANALYSIS OF CUSTOMER DEMAND 29 (2001),
http://www.cfsa.net/downloads/analysis_customer_demand.pdf; The Community Financial
Services Association of America, http://www.cfsa.net/who_we_serve.html (last visited April 20,
2010) [hereinafter “CFSA”].
48. See LOGAN & WELLER, supra note 45 (reporting that according to the 2007 Survey of
Consumer Finances, “[t]he largest share of payday loan borrowers (39 percent) had a high school
diploma or equivalent General Education Development, or GED certificate, but no college
degree”); see ELLIEHAUSEN & LAWRENCE, supra note 47, at 33 (finding that the largest
percentage of payday loan customers had received just a high school diploma).
49. See LOGAN & WELLER, supra note 45, at 7.
50. See APGAR & HERBERT, supra note 47, at xii.
51. LOGAN & WELLER, supra note 45, at 7.
52. See CFSA, supra note 47.
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Consumer Finances “show[ed] that the mean income of families who took
out a payday loan was $32,614 . . . [while] the median income of payday
loan borrowers was $30,892.”53 In comparison, the same survey found that
the mean income of families who did not take out a payday loan was
$85,473,54 which is more than twice the mean income of families who did
take out a payday loan. The median income of non-payday loan borrowers
was $48,397,55 which is more than one and a half times greater than the
median income of payday loan borrowers.
Not surprisingly, numerous studies have found that most payday loan
borrowers are credit constrained.56 For example, a 2001 study found that
“relative to all U.S. adults, three times the percentage of payday loan
customers are seriously debt burdened and have been denied credit or not
given as much credit as they applied for in the last 5 years.”57 The same
study found that “[p]ayday loan customers are also four times more likely
than all adults to have filed for bankruptcy.”58 These findings were
confirmed again more recently by the FINRA Investor Education
Foundation, which reported that alternative methods of borrowing,
including payday loans, “are used disproportionately by the unbanked.
Thus, lack of a bank account is likely to result in the utilization of high-cost
borrowing.”59
II. THE CAUSAL CONNECTION BETWEEN PAYDAY LOANS AND
BANKRUPTCY
Many scholars have studied the connection between payday loans and
bankruptcy, and their studies are discussed below. Some studies have
concluded that payday loans do not cause bankruptcy.60 The evidence on
which these studies rely suggests that once states have banned payday
53. See LOGAN & WELLER, supra note 45, at 7.
54. Id.
55. Id.
56. Michael A. Stegman, Payday Lending, 21 J. ECON. PERSPECTIVES 169, 173 (2007)
(citing ELLIEHAUSEN & LAWRENCE, supra note 47, at 33).
57. Id.
58. Michael A. Stegman & Robert Faris, Payday Lending: A Business Model that
Encourages Chronic Borrowing, 17 ECON. DEV. Q. 8, 15 (2003).
59. Financial Capability in the United States, FINRA Investor Educ. Found.,
http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/foundation/p120
535.pdf (last visited Feb. 1, 2010) (“Many of the users of these alternative methods of borrowing
also did not have credit cards.”).
60. See, e.g., Morgan & Strain, supra note 12, at 3.
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lending,61 residents of those states experience higher Chapter 7 bankruptcy
filings, bounce more checks, and file more complaints with the Federal
Trade Commission against lenders and debt collectors after abolishing
payday loans.62 Other scholars argue that payday loans do lead to increases
in bankruptcy filings.63 Proponents of this view base their findings, at least
in part, on a case-by-case analysis of bankruptcy petitioners who have taken
out payday loans, and by analyzing their common characteristics.64
These studies vary widely in their focus and the factors considered
relevant in determining a causal link. While those who find no connection
between payday loans and bankruptcy focus on larger trends (i.e. general
comparisons of the number of bankruptcies filed in states with and without
payday lenders),65 those who claim that there is a connection limit their
review to the microcosm of the individual bankruptcy debtor.66 Although it
is difficult to determine whether there is a definitive causal link or just a
correlation between payday loans and bankruptcy, studies on the subject
have identified common factors among individuals who file for bankruptcy
and payday loans.67 This Part briefly reviews some of the relevant literature
on bankruptcy and payday lending, and raises questions that the authors
hope may be addressed in future studies.
In addition to reviewing the literature on bankruptcy and payday loans,
this Part also discusses a common misconception, namely that measuring
financial distress in general is best accomplished by measuring bankruptcy
rates. This is not the case because many financially distressed consumers
do not have access to an attorney and have no assets to save in bankruptcy
in any case.68 This Part also discusses payday loan usage rates among the
general population, so these rates can be compared to the rates of payday
usage we found in the bankruptcy data.
61.
62.
63.
64.
Naturally, these are states that at one time allowed payday lending.
Morgan & Strain, supra note 12, at 3.
See, e.g., Skiba & Tobacman, supra note 12, at 3.
See, e.g., Mayer, supra note 12, at 76-77; see also Skiba & Tobacman, supra note 12, at
4.
65. Stoianovici & Maloney, supra note 12, at 17 (“Controlling for the intensity of payday
lending stores, we find that, if anything, the presence of payday stores in a state is associated with
a smaller number of [C]hapter 7 bankruptcy filings. The effect is very small: [C]hapter 7 filings
go down by about 1 filing per 1 million persons.”).
66. See Mayer, supra note 12, at 76.
67. See id. at 78 (concluding that debtors who take out payday loans go bankrupt more
quickly, with less debt than expected).
68. Nathalie Martin, Poverty, Culture, and the Bankruptcy Code: Narratives from the Money
Law Clinic, 12 CLINICAL L. REV. 203, 230 (2005); Elizabeth Warren, Jay Westbrook & Theresa
Sullivan, THE FRAGILE MIDDLE CLASS 135 (2000).
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A. Surveying the Literature
For his article Payday Lending and Personal Bankruptcy,69 Professor
Robert Mayer collected data from a random sample of bankruptcy
petitioners in three different state‟s counties over the course of three years.
Based on the data he collected, Mayer calculated that a total of 9.1 percent
of the bankruptcy petitions he studied listed one or more payday loans.70
From his data, Mayer also compiled mean characteristics on the bankruptcy
petitioners he reviewed from two of the three counties, as well as the
corresponding effects of payday loans on debt-income ratios.71 His analysis
of the effects of payday loans on debt-income ratios showed that those
debtors with payday loans “went bankrupt with half a year‟s gross
household income less in total debt [than those debtors with no payday
loans].”72 This led Mayer to conclude that payday loan debtors “go
bankrupt more quickly, with less debt than we might expect given their
level of income.”73
In a later study of bankruptcy debtors in Wisconsin, Mayer found that
many payday loan customers take out payday loans from more than one
lender, frequently in amounts that exceed their paychecks.74 As Professor
Robert Mayer explains:
[P]ayday advance creditors in Milwaukee County repeatedly make loans
to debtors in financial crisis who already have one or more payday loans.
Together these loans frequently exceed the amount of the borrower‟s next
paycheck, making roll-overs inevitable. The debtor has one payday but
many payday loans, and when combined in this way these loans function
75
like a large, long-term, very expensive, interest-only cash advance.
For this study, Professor Mayer examined a sample of 500 bankruptcy
petitions filed by residents of Milwaukee County during the summer of
2004, looking for petitions listing more than one payday loan.76 If his
sample is representative of the entire population filing for bankruptcy in
Milwaukee County, then roughly 825 households went bankrupt in the
69. Mayer, supra note 12, at 78.
70. Id.
71. Id. at 79-80.
72. Id. at 78. We actually find this to be counterintuitive, as we would expect the use of
payday loans to put off debtor judgment day for at least as long as one could rob Peter to pay Paul.
73. Id.
74. Robert Mayer, One Payday, Many Payday Loans: Short-Term Lending Abuse in
Milwaukee County, at 1 (Loyola U. of Chicago, Working Paper), http://lwvmilwaukee.org/
mayer21.pdf (last visited Feb. 4, 2010).
75. Id. at 1.
76. Id. at 2.
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county in 2003, owing more than one payday loan at a time (10.6 percent of
all petitioners).77 Some petitions listed as many as nine of these loans, with
the median debtor claiming one or more of these debts owed his or her
entire next paycheck to payday lenders.78 Most of the debtors had been
rolling over the principal for many months.79 Seventy percent of the people
who listed a payday loan on their petition had more than one.80 If
petitioners had any payday advances, chances are they had several. Indeed,
Mayer found that almost thirty percent had four or more.81
In their article, Do Payday Loans Cause Bankruptcy?,82 Paige Skiba
and Jeremy Tobacman collected data from payday loan applications
submitted to a single national financial services provider. By distinguishing
between the credit scores of those individuals approved for payday loans
and those who were rejected, Skiba and Tobacman matched individuals
based on their payday loan applications with public records on bankruptcy
petitions filed in the state of Texas. Through this procedure, Skiba and
Tobacman “measured the effect of payday loan access on [C]hapter 7 and
[C]hapter 13 personal bankruptcy filings.”83 Based on this measurement,
they found that “for first-time applicants near the 20th percentile of the
credit-score distribution, access to payday loans cause[d] Chapter 13
bankruptcy filings over the next two years to double.”84
In analyzing payday loan customers for her article Taming the Beast:
Payday Loans, Regulatory Efforts, and Unintended Consequences, Mary
Spector reviewed studies conducted by government agencies, industry
representatives, and consumer advocacy organizations.85 While noting that
studies of payday loan customers vary widely depending on who conducted
the study, she concludes that “the typical payday borrower does not have
access to traditional credit outlets and often seeks a short-term loan because
of a financial emergency.”86 To support this conclusion, Spector noted that
“[o]ne industry study reported that 15.4% of all payday borrowers have
77. Id.
78. Id.
79. Id.
80. Mayer, supra note 74, at 5.
81. Id.
82. Skiba & Tobacman, supra note 12, at 8.
83. Id. at 11.
84. Id. at 1.
85. Spector, supra note 12, at 965.
86. Id. at 966; see also ELLIEHAUSEN & LAWRENCE, supra note 47, at 33, http://www.cfsa.
net/downloads/analysis_customer_demand.pdf.
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filed for bankruptcy—compared with 3.7% of the general population—and
only 41.7% own their homes—compared with 66.3% of all adults.”87
By contrast, Morgan and Strain restricted their study to a comparison
of the “patterns of returned (bounced) checks at Federal Reserve check
processing centers, complaints against lenders and debt collectors filed by
households with the FTC (Federal Trade Commission), and federal
bankruptcy findings” in Georgia and North Carolina before and after each
state banned payday lending.88 Based on this comparison, Morgan and
Strain conclude that their study provides evidence that “would-be payday
borrowers” suffer more without recourse to payday loans because they are
forced to bounce checks, which the authors claim is more costly than taking
out a payday loan.89 Interestingly, while Morgan and Strain acknowledge
that the number of Chapter 13 filings decreased after payday loans were
banned in Georgia and North Carolina, they dismiss this finding as
irrelevant to the relationship between bankruptcy and payday lending
because “rescheduling under Chapter 13 is for filers with substantial assets
to protect, while Chapter 7 (“no assets”) is for everyone else, including, as
seems likely, most payday borrowers.”90
Skiba and Tobacman exclusively collected and correlated data from the
state of Texas, which they acknowledge has an unlimited homestead
exemption.91 This led us to wonder how their findings92 might differ in a
state with either a limited or no homestead exemption. For example, would
they find that access to payday loans had a measurable effect on Chapter 7
bankruptcy filings? Or would they again conclude that “[t]here are no
statistically significant overall effects of access to payday loans on
87. Spector, supra note 12, at 966. Spector also concluded that most payday borrowers
require “multiple loans or rollovers to extend the life of the loan. . . . Indeed, data suggests that
90% of payday loans are made to borrowers who have engaged in more than five payday
transactions in the previous twelve months.” Id. at 967.
88. Morgan & Strain, supra note 12, at 2.
89. Id. at 26.
Georgians and North Carolinians do not seem better off since their states outlawed payday
credit: they have bounced more checks, complained more about lenders and debt collectors,
and have filed for Chapter 7 (“no asset”) bankruptcy at a higher rate. The increase in
bounced checks represent a potentially huge transfer from depositors to bank and credit
unions. Banning payday loans did not save Georgian households $154 million per year, as
the CRL projected, it cost them millions per year in returned check fees.
Id. (emphasis in original).
90. Morgan & Strain, supra note 12, at 5.
91. Skiba & Tobacman, supra note 12, at 12.
92. Id. at 3 (finding that “our regression-discontinuity estimates imply a doubling of Chapter
13 bankruptcy petitions within two years of a first-time applicant‟s successful payday loan
application”).
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[C]hapter 7 bankruptcy filings”?93 In addition, Skiba and Tobacman note
that there is “strong evidence that [C]hapter 13 is largely used by debtors
solely to avoid home foreclosures.”94 They support this conclusion again
when they explain that “[a]ccording to informal communications with the
PACER Service Center, debtors file under [C]hapter 13 in order to protect
their homes from foreclosure.”95 This led us to wonder whether Skiba and
Tobacman would agree with Morgan and Strain‟s conclusion that people
who file for Chapter 7 bankruptcy have fewer assets (or “no assets” as
Morgan and Strain would say) than those who file for Chapter 13
bankruptcy.
Overall, Morgan and Strain‟s study seemed the least scientific and
consequently the least valid because it failed to establish a causal link
between the number of bounced checks and payday loans. While their
study posited that the number of bounced checks, Chapter 7 bankruptcy
filings, and complaints against lenders and debt collectors increased
following the abolition of payday lending in the states of Georgia and North
Carolina,96 it seems equally likely that these outcomes were the result of the
fact that the median household income fell 6.7 percentage points in both
Georgia and North Carolina over roughly the same period of time, when
median household income data from those states in 1999-2000 is compared
to median household income data from those states in 2003-2004.97
Finally, while Spector uses studies from government agencies, industry
representatives, and consumer advocacy organizations,98 she notes that the
results from each study vary widely depending on who conducted the
study.99 From this observation, a formal comparison of these studies,
particularly how and where the data informing each study are collected,
would be useful to understanding the true characteristics of payday loan
borrowers.
To us, the more interesting question about bankruptcy and payday
loans, however, is not whether payday loans cause bankruptcy, but rather
what information we can draw about payday loan use from the bankruptcy
data, including information about the frequency of use of these loans, the
93. Id. at 15.
94. Id. at 11.
95. Id. at 13.
96. Morgan & Strain, supra note 12, at 1 (stating that payday lending was banned in Georgia
and North Carolina in 2004 and 2005 respectively).
97. JACK REED, ECON. POLICY BRIEF 4 tbl. 1 (Sept. 2005), available at http://www.jec.
senate.gov/archive/Documents/Reports/income7sep2005.pdf.
98. Spector, supra note 12, at 965.
99. Id.
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frequency of use of multiple loans, and the increase in the use of these loans
over time.
B. The Danger of Comparing Payday Lending Rates and Bankruptcy
Rates
It is important not to assume that all financially stressed borrowers will
end up in bankruptcy, as even bankruptcy is expensive and inaccessible to
many Americans.
One popular money management blog recently
suggested we measure the current 2010 economic recovery by its own
“misery index,” a combination of statistics on rates of food stamp use,
bankruptcy filings, long-term unemployed, foreclosures, and credit card
defaults.100 This is a hard index to argue against, as none of these misery
indicators are likely to increase during good times. The entry notes that
bankruptcy rates are way up in 2009, and that there were nearly as many
people filing for bankruptcy as those filing for a divorce.101 Another blog
found nearly 5,900 bankruptcy filings a day in 2009, though it did report a
decrease in filings in December of 2009.102
While bankruptcy rates are unquestionably inching upward as a result
of the recession, scholars have always known that bankruptcy is primarily a
middle class phenomenon.103 Poorer people often have less access to an
attorney, and also may be judgment-proof and thus find less need for
bankruptcy than people with more income and more assets.104 Poorer
people also have historically had less access to credit, though that may be
less true today than in the past.105 In any case, given that middle class
members have traditionally used bankruptcy more frequently than people of
lesser means, we need to be very careful about using bankruptcy as a proxy
for financial distress across all class lines. In other words, bankruptcy is a
poor proxy for financial distress in general, and particularly for people in
poverty. For example, New Mexico is consistently in the top three states
100. See mybudget360.com, The 5 Indicators of the Misery Index, http://www.
mybudget360.com/bankruptcy-filings-to-match-divorce-filings-in-2009-15-million-358-millionamericans-on-food-stamps-11-percent-of-the-population-the-5-indicators-of-the-misery-index/
(last visited Jan. 24, 2010).
101. Id.
102. Posting of Bob Lawless to Credit Slips, http://www.creditslips.org/creditslips/
bankruptcy_data/ (Jan. 29, 2010, 13:42 EST).
103. See Warren, Westbrook & Sullivan, supra note 68, at 135.
104. See Martin, supra note 68, at 230.
105. Id.
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for poverty levels,106 and yet it is only number thirty-seven in rank for
number of bankruptcy filings per capita.107 This simply means that we
cannot measure all financial failure through bankruptcy filing rates. Some
people are literally too broke to go bankrupt.
C. Rates of Payday Loan Use
So what percentage of the population uses payday loans? Good data on
what percentage of the population uses payday loans are hard to come by.
In consultation with the President‟s Advisory Council on Financial Literacy
and the Department of the Treasury, the FINRA Investor Education
Foundation commissioned a study of the financial capability of adults living
in the United States.108 The first portion of this study, which reports on a
nationally-projectable telephone survey of approximately 1,500 adults, was
published in December of 2009.109 The data collected for this study show
that only five percent of respondents had taken out a payday loan in the past
five years.110 This finding is assumed to be representative of the general
adult population living in the United States.111
The 2007 Survey of Consumer Finances,112 a triennial study sponsored
by the Federal Reserve Board in cooperation with the Department of the
Treasury, reported that 2.4 percent of families surveyed had taken out a
payday loan in the previous year.113 The data collected for the 2007 Survey
of Consumer Finances are similarly designed to be representative of United
States families.114
106. StateMaster.com, Economy Statistics > Percent Below Poverty Level (Most Recent) by
State, http://www.statemaster.com/graph/eco_per_bel_pov_lev-economy-percent-below-povertylevel (last visited Jan. 24, 2010).
107. StateMaster.com, Bankruptcy Filings (Per Capita) by State, http://www.statemaster.com/
graph/eco_ban_fil_percap-economy-bankruptcy-filings-per-capita (last visited Apr. 6, 2010).
108. See FINRA Investor Educ. Found., supra note 59, at 24.
109. See id.
110. See id. at 11.
111. See id. at 24.
112. FED. RESERVE BD., 2007 SURVEY OF CONSUMER FINANCES (2007),
http://www.federalreserve.gov/pubs/oss/oss2/2007/scf2007home.html (last visited Feb. 1, 2010).
113. Brian K. Bucks et al., Changes in U.S. Family Finances from 2004 to 2007: Evidence
from the Survey of Consumer Finances, 95 FED. RESERVE BD. FED. RES. BULL. A1, A47 (2009),
available at http://www.federalreserve.gov/pubs/oss/oss2/2007/bull09_SCF_nobkgdscreen.pdf.
114. See id. at A1, A2, A3.
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A recent Alberta study found that approximately three percent of the
citizens of that province used payday loans.115 The study from which this
data was gleaned was completed by industry experts at the request of the
Consumer Services Branch of the Ministry of Service Alberta.116 Thus, it is
an industry study, but was commissioned by the Alberta province
government.117 Another study conducted by Leger Marketing in December
2008 provided an estimate of six percent of the general population using
payday loans, based on a sample size of 900.118 Overall then, the range of
people in the general population that use payday loans in the United States
and Canada appears to be between 2.4 percent and six percent.119
III. DESCRIPTION OF EMPIRICAL STUDY OF BANKRUPTCY AND PAYDAY
LENDING
In the summer of 2009, we set out to measure the incidence of payday
loan usage among bankruptcy debtors in New Mexico.120 To do this, we
chose one month of the year, June 2009, to gather and analyze all the
bankruptcy schedules and statements of every consumer bankruptcy debtor
in New Mexico. We looked first at schedule D and F to determine if there
were any payday lenders listed. We had a list of all such lenders operating
in New Mexico, which we had compiled in connection with another payday
lending study we were conducting. Thereafter data also were collected on
the occupations and income levels of all those borrowers who reported
payday lenders on their schedules D and F that will be used in connection
115. Consumer Servs. Branch of the Ministry of Serv. Alberta, Gov‟t of Alberta, Payday Loan
Business Regulation Consultation: A Report on Stakeholder Input by the Payday Loan Business
Regulation Working Committee 15 (2009), http://paydayloanindustry.com/Canadian_Payday_
Loan_Consultation_Report_June_2009.pdf.
116. See id. at 3-4. The study was conducted from December 2008-January 2009, and
consisted of two components:
1. A telephone survey of 700 Albertans including 300 users of payday loans and 400 nonusers, aged 18 years and over. Results for users are statistically accurate to within ± 5.7
percentage points, 19 times out of twenty. Results for non-users are statistically accurate to
within ± 4.9 percentage points, 19 times out of 20.
2. Four focus groups, including three conducted with payday loan users (one in Edmonton,
one in Calgary and one by conference call covering smaller centers) and one conducted with
non-users in Edmonton.
Id.
117. See id. at 3.
118. PaydayLoanIndustryBlog, New Payday Loan Industry Survey Results Available,
http://paydayloanindustryblog.com/new-payday-loan-industry-survey-results-available/
(last
visited Feb. 7, 2010).
119. See Bucks, supra note 114, at A47; PaydayLoanIndustryBlog, supra note 118.
120. This study was conducted by Nathalie Martin and her research assistant Ozy Adams.
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with a subsequent article. We later repeated this data-gathering process for
June of 2007 and June of 2008, in order to measure whether the usage of
payday loans was constant over this three-year period, in relation to the
number of overall bankruptcy debtors. In total, we gathered and studied
data from 1,179 petitions, 269 in 2007, 377 in 2008, and 506 in 2009.
For June of 2009, we found that 14 percent of bankruptcy debtors listed
at least one payday loan in their schedules, and 56.1 percent of those who
had loans had more than one listed. For 2008, 23 percent of bankruptcy
debtors listed at least one payday loan in their schedules, and 76.8 percent
of those who had loans had more than one listed. For June of 2007, we
found that 23 percent of bankruptcy debtors listed at least one payday loan
in their schedules, and 76.1 percent of those had more than one listed.
Under any measure, the data show that bankruptcy filers in New Mexico
used a tremendous number of payday loans, and unquestionably far more
than in the general population.
In summary, our data show that from 2007 to 2009, an average of 18.9
percent of bankruptcy debtors in New Mexico reported using payday loans.
Compared to the use of payday loans reported in other studies among the
general population, as well past studies on payday loan use among
bankruptcy debtors, this rate of usage is extremely high and possibly rising.
Previous studies show that payday loan use among the general population
ranges between 2.4 percent and 6 percent of the population.121 Payday loan
usage rates as found in our study reveal a rate of usage for bankruptcy
debtors at four to five times that of the general population.122 Thus, there is
no denying the strong correlation between the use of payday loans and
subsequent bankruptcy filings.
Moreover, the correlation seems to be getting stronger, as the use of
these loan products appears to be growing. In comparing Professor
Mayer‟s data on New Mexico bankruptcy debtors and the use of payday
loans to our own, we found that from 2007 to 2009, the percentage of
bankruptcy debtors who reported using payday loans had nearly doubled.
Professor Mayer reported a payday usage rate among New Mexico debtors
of 10 percent as of 2000-2002.123 He reported a usage rate of 15.2 percent
121. The 2.4 percent was for a study in which people were asked if they had used a payday
loan in the past year. See Bucks, supra note 114, at 47. The 6 percent came from an industry
study that measured payday loan use over a person‟s entire lifetime. See PaydayLoan
IndustryBlog, supra note 118.
122. Twenty-three per 100 compared to 6 per 100 on the high end, and 2.4 compared to 17
percent on the low end.
123. See Mayer, supra note 12, at 78.
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among Milwaukee debtors in 2004.124 By 2007 and 2008, we found a usage
rate of 18.9 percent in New Mexico. This is a huge increase in payday loan
usage among bankruptcy debtors. Moreover, while the percentage of New
Mexico bankruptcy debtors using payday loans dropped from twenty-three
percent in 2007 and 2008 to seventeen percent in 2009, the number of
payday loans users remained more or less the same. There simply were
many more bankruptcy filings in 2009, consistent with a nationwide
spike.125
There also seems to be a strong correlation between payday use and
bankruptcy, as studied from the perspective of the payday loan user rather
than the bankruptcy debtor. An industry study found that in 1999, 15.4
percent of payday users reported filing for bankruptcy, compared to 3.7
percent of the general population.126 Thus, using a different measure,
payday loan users seem to be five times more likely than the average person
to file for bankruptcy. This is different from, but somewhat consistent with,
our finding that bankruptcy filers are four to five times more likely to use
payday loans than the general population.
If use of payday loans is seen to be a problem, then the problem is
growing, despite efforts by states to cut down on the use of these loans, and
certainly to curb the use of multiple loans at one time. Usage of multiple
payday loans at one time has increased drastically. Recent bankruptcy
debtors report using far more simultaneous loans per person or family than
in the past.
Mayer found that 15.2 percent of the bankruptcy filers in Milwaukee in
June and July of 2004 had at least one payday loan and that 10.6 percent
had more than one.127 During the periods we studied, 18.9 percent had at
least one payday loan and 13.2 percent had more than one. Among those
with payday loans, an amazing 69.3 percent had more than one loan, 37.1
percent had more than five, and 13.8 percent had more than ten. While
Mayer found that one New Mexico woman had eighteen loans back in
2000, one woman in our sample had thirty-five simultaneous loans. This is
particularly remarkable, given that New Mexico passed a law in 2007 that
124. See Mayer, supra note 74, at 5.
125. Bankruptcy Filings Spike in the Area and Nationwide, WASH. POST, April 26, 2010,
available at http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR20100423050
16.html (last visited May 18, 2010) (“The U.S. rate [of bankruptcy filings] last year rose 75
percent.”).
126. See ELLIEHAUSEN & LAWRENCE, supra note 12, at 46.
127. Mayer, supra note 12, at 81. He found these multiple loan so worthy of note that he
dedicated an entire article to the topic, entitled One Payday, Many Payday Loans. See Mayer,
supra note 74.
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allegedly limited payday loans to twenty-five percent of each person‟s gross
income, and allegedly prohibited rollovers of such loans.128
All of this suggests that former studies that measure the extent to which
borrowers use multiple loans at one time severely underestimate the use of
multiple loans, at least among people who later file for bankruptcy. These
former studies underestimate the current number of bankruptcy debtors who
use these loans, and among those who have them, they underestimate the
number of loans people have at one time.
IV. CONCLUSION
Numerous states around the country are attempting to regulate payday
loans by cutting down on their costs, reducing the use of multiple loans at
one time, and curbing abuses by lenders. The data reported on here suggest
that these are necessary measures. The use of multiple payday loans at one
time significantly curtails a consumer‟s ability to meet his or her other
ongoing expenses.
Multiple loans would seem to lead to bankruptcy, at least for some,
assuming the consumers involved have not already filed for bankruptcy in
the past eight years,129 and further assuming that they can afford a
bankruptcy attorney. While we have no data to support this particular
conclusion, our sense is that payday borrowers as a whole are worse off
economically than bankruptcy debtors as a whole. Bankruptcy is known to
be a primarily middle class remedy for over-indebtedness. Indeed, one
needs a lawyer and assets to save in order to find bankruptcy worthwhile.
Whether payday borrowing leads to bankruptcy or simply makes it
harder to make future ends meet, there is no question that the millions of
dollars consumers spend each year on short-term loan fees could be put to
more productive societal use, for example, to save for emergencies, to pay
the rent and buy food, or even to buy durable goods in order to fuel the
manufacturing economy. Payday loans are a drain on society and
particularly on society‟s most credit-constrained citizens. This Article and
the data contained in it help demonstrate that the problems caused by
128. See N.M.STAT. ANN. §§ 58-15-32, -38 (West 2009). The law was entirely unsuccessful
and did absolutely nothing to curb abuses by lenders because the loans covered by the new law
were defined as those in which the loan duration was between fourteen and thirty-five days, and in
which the lender took a post-dated check or an automatic debit right. Lenders quickly found a
way around these laws. See Martin, supra note 40, at 21-22 (page numbers refer to the manuscript
draft, on file with author).
129. One can only obtain a discharge in bankruptcy once every eight years. 11 U.S.C.
§ 727(a)(8) (2006).
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payday lending are not going away. To the contrary, they seem to be getting
worse.